Question

Pure Water Products produces two types of water filters. One attaches to the faucet and cleans all water that passes through the faucet. The other is a pitcher-filter that only purifies water meant for drinking. Revenue and cost information for each product appears below: ● the unit that attaches to the faucet is sold for $70 and has variable costs of $45 ● the pitcher-filter sells for $80 and has variable costs of $30 ● fixed costs total $442,000 ● Pure Water sells 4 faucet models for every 3 pitcher-filters sold Assume that last year, the company sold 11,934 pitcher-filters. Calculate the degree of operating leverage reported by Pure Water Products last year. Enter your answer with two places after the decimal point.

Answer 1

Pitchers filters units sold = 11,934

Faucet units sold = (11,934*4/3) = 15,912

Particular	Faucet	Pitchers	Total
Selling price	$70	$80
Variable cost	$45	$30
Contribution margin (per unit)	$25	$50
Contribution margin (dollar)	$397,800	$596,700	$994,500

Operating income = $994,500 - $442,000 = $552,500

Degree of operating income

= Contribution margin/operating income

= $994,500/$552,500

= 1.8 times